Question

1. Dantell Ltd is developing a new clothes dryer, Dry Master, that it plans to sell to coin-operated laundries. Currently, the market leader is a product called Lacy, which is sold by a competitor. The managing director of Dantell Ltd, Jane Don, has engaged a market research agency to help assess the appropriate selling price for the new clothes dryer.

The agency has surveyed a range of laundries and determined the following data for the Lacy:

Selling price	$18 000
Installation costs	$     300
Yearly maintenance cost	$ 1 200
Expected useful life	8 years
Disposal value	zero

Engineering estimates have determined that the Dry Master will require maintenance costing $900 per annum, and will have a useful life of nine years with a disposal value of zero. In addition, the new product will dry clothes more quickly than the Lacy and will result in softer and fluffier clothes. The value of this improved functionality to the customer is estimated at $600. Customers will need to incur average installation costs for the Dry Master of $450 per machine.

Required:

1. Determine the economic value to the customer of the Dry Master. (Do not consider the time value of money.)
2. What price should Dantell charge for the new product? Explain your answer.
3. What additional factors and information should Jane consider before he sets the price for the new product?

Answer 1

Question :

(a) Computation of Economic Value to the customer of Dry Master.

Sr.No.	Particulars	Amount $
1	Price of the next best alternative (Lacy)	18,000
2	Less : additional installation cost per machine of Dry Master, as compared to Lacy ($ 450 - $ 300)	150
3	Add : Savings in annual Maintenance cost as compared to Lacy	300
4	Add : Benefit Due to improved functionality	600
5	Economic Value to the Customer of Dry Master	18,750

(b) Dantell should charge $ 18750 per Dry master from customer. i.e machine should be priced at its Economic Value to the customers.

This incorporates benefits that a product sis intended to deliver to the customer when compared to the other product.

Cost of Next best alternative is the cost of comparable product offered by some other company (Lacy in this case)

The company's (Dantell's) product (Dry Master) is superior to the Lacy with respect to the time required to dry, effect of washing on clothes, annual maintenance costs, but has higher installatin costs.

All such advantages and disadvantages have been considered before pricing the Product (Dry Master) at its economic Value to the customer.

(c) Factors and information that should be considered by Jane before setting the price of a new product

1. Sensitivity of Market Demand to the Price of the Product

2. Value of Product Differentiation offered by the new product

3. Prices charged by the competitors

4. Presence and prices of Close substitutes of the new product